A couple of weeks ago we talked about business plans and how important they were when applying for a small business loan. Projections are an important part of any business plan and Adam explains the ins and outs of creating projections that will help you communicate with a lender or investor.

Readable Transcript

Information you need, the podcasts you trust, this is the PatrickWiscombe.com podcast network. Bringing you interviews with top business professionals and business financing tips to fuel your American dream. This is the Business Fuel Podcast heard exclusively on Lendio.com. And now, here are your hosts, Ty Kiisel and Patrick Wiscombe.

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Patrick Wiscombe: Serving over 360,000 people, this is the Business Fuel Podcast. Good morning, I’m Patrick Wiscombe. Thank you for tuning us in and taking us along whenever and however you are accessing the podcast. Coming up here in a few minutes we’re going to be speaking with Adam Hoeksema who’s the co-founder of ProjectionHub which is a web application which helps entrepreneurs create financial projection. You can find them online at ProjectionHub.com. We’ll bring him in here in just a second, but before we get to Adam let me bring in the producer and co-host of the podcast, Ty Kiisel. He is fresh from a motorcycle trip.

Ty Kiisel: Hi, how are you Patrick?

Patrick: Are you wind blown?

Ty: A little bit. It was nice, we went down to Phoenix to get away from the cold for a little bit. So all of the podcast guests who talk about being from San Diego, we’ve been in Arizona so we’re as warm as you are.

Patrick: It’s fairly chill here in the morning, about mid 30’s. As you’re headed south, where’s the line where you can finally take off the jacket?

Ty: About St. George (Utah). Once you get into Las Vegas, it’s pretty nice.

Patrick: Was it worth it?

Ty: Absolutely!

Patrick: Adam, I’ll bring you into the conversation. Did you see the new Tonight Show starring Jimmy Fallon?

Adam: I haven’t seen it yet, but I’ve seen some highlights. It looks like he started off with a bang.

Patrick: Ty, did you see it?

Ty: I didn’t, but I guess I’m going to have to stay up past my bed time or record it.

Patrick: Do you guys like the band U2? They played on top of Rockefeller Center and the background of New York City at sunset was unbelieveable. It sounded great. They also played an acoustic version of Academy Award nominated, “Ordinary Love.” Those guys are super talented. I’ve seen them live once. Have you guys seen them live?

Ty: I haven’t seen them live, but the acoustic version sounds pretty cool. I like the acoustic thing.

Patrick: Let’s get into financing. My opening question Adam, is why did you create ProjectionHub? And what is ProjectionHub?

Adam: ProjectionHub is a web application that helps customers create financial projections. The easiest thing to compare it to would be Turbotax. They take a complicated process, doing taxes, and break it down into a bunch of simple steps and questions. We tried to create a similar usability for our customers which allows you to come up with up to 3 years of projections. You asked how we started it. For my day job, I manage a micro loan program in central Indiana. So we make small business loans up to $50,000 to people around this area. One of the things we often ask our applicants for is financial projections. So for years I’d been using Excel templates and trying all different kinds of templates. I would give the template to the entrepreneur and get the “deer in the headlights” look. It just wasn’t working. So back in 2012, I was doing my taxes using Turbotax and I thought, “There’s got to be something like Turbotax to do financial projections.” I couldn’t find anything. So I called my brother who’s a computer science major in college and asked him if he’d be interested in helping. He agreed and I bought him a laptop computer for his work over the summer and that’s how we got started.

Ty: I’m excited to talk about this because in the last couple of weeks, we’ve talked about the importance of creating a business plan. Part of a relevant business plan are projections as to what you anticipate the proceeds of a loan would be. These kinds of projections were never my strong suit. When I was doing my business, looking into spreadsheets was like a foreign world to me. Maybe we should talk about what kinds of things need to be included in financial projections. What are lenders looking for? And why are financial projections so important?

Adam: At the end of the day, the lender is looking to see if the business can pay them back. From a projections standpoint, there are a couple of things the lender is really going to be focused on. Specifically, they want data driven, assumptions driven projections. They want to see how you came up with these projections. If it looks like you’re just pulling these numbers out of the air, the lender is going to feel uncomfortable. But if in addition to the numbers, you look at the average of 3 different competitors that’s how I came up with the sales price I want to use, things that are data driven are always better than a guess. I think that’s one thing lenders are looking for. And number two, they’re going to try to stress test your projections a little. What we do is ask, “If you’re biggest customer, who is 20% of your sales, went away, what would happen? Do you still have the ability to make your loan payment?” You’ve got to be able to think through that so the lender has an understanding of where you’re at and how dependant you are on any one given customer.

Ty: So does ProjectionHub’s software allow you to do a lot of “what if” scenarios? Because it sounds like that’s what the lender is going to be asking for.

Adam: The nice thing is you can either make changes within the software, or download multiple times. You actually get an Excel model as an example when you finish the process. Then you can go in and there’s a data tab that allows you to mess around with the different assumptions. You could have several different tabs with best case scenario and worst case scenario and somewhere in the middle. That would be very easy.

Ty: My challenge was always coming up with realistic numbers. Since you’re really kind of guessing and anticipating, how do you keep things realistic?

Adam: There are some areas where being realistic is important and some where it’s not so important. First, I’ll give you an example of an area where you shouldn’t really stress too much. If you’re not sure that your phone and internet costs are going to be $49 a month or $69 a month, it’s not that big of a deal. Where you do need to be careful is on your costs of goods sold. Because your costs of goods sold impacts every time you sell that product or service. So let’s say you think it’s going to take 15 minutes to produce a product. And turns out, it actually takes 20 minutes. That’s only 5 minutes, that doesn’t sound like too much. But that’s a 33% difference in your labor costs right there. When you start making 100,000 units, that difference on each unit completely ruins your projections. It may make it so the business doesn’t work. So those costs of goods sold assumptions, you’ve got to be as close as you possibly can. Test it out as much as you can.

Ty: In the context of a lender, the biggest reason to do this is to demonstrate you can pay back the loan. There are a lot of entrepreneurs who don’t go to the bank who look for equity funding from a venture capitalist or something. I assume they’re looking for something a little bit different. Can you explain what that difference might be?

Adam: A lender is happy if they get their money back plus 8% annually. With an investor, they’re looking for a high potential, outsized returns. Your projections need to show the ability of your company to scale and how the investor has the potential to increase 5% or 10% what they put in. If your projections show the investor gets 30% return that’s good, but there’s a lot of risk there. But they might think that if they’re going to put that much on the table, they’ll look for something where they would get 10 times the return. So that’s where your projections need to reflect the potential for your investor.

Ty: However, I would assume that if you’re trying to project and exponential growth like that, they still want reliable, realistic numbers right?

Adam: Absolutely. Just because your graph goes up and to the right, they’re still going to look at those assumptions and the data behind it.

Ty: How do you validate assumptions? If you’re a small business owner and you’re doing financial projections, is there a process or formula you would suggest for validating the assumptions that are going to run the model?

Adam: It’s often tempting to take the top down approach. “I’ve got this $100,000,000 market and I could take 1%.” That sounds small. But what the entrepreneur should really do is start from the ground up. Say for example the sales team makes 25 calls a day. You know that out of those 25 calls, you will get 5 meetings. Of those 5 meetings, you will close 2 of them. Those 2 new customers will stick with you for 24 months. So some of those will end up guesses. But you need to build a model that way so that at each step, you’ll have a conversion rate. It’s really about the process of going from the bottom up to get to that million dollars and not just saying if we get 1% of the market, we’ll have a million.

Ty: So the more you can look back and see what you’ve done historically, the easier these projections become.

Adam: Absolutely. But do a lot of testing on a small scale first. Then you can assume those projections will stay the same as you grow.

Ty: What are some of the biggest mistakes people make when they put projections together?

Adam: A lot of times the temptation is to assume you can get some percentage of the existing market. It just doesn’t work, there’s no guarantee. That’s really a huge red flag for a lender.

Ty: Is there something else that’s just “shooting yourself in the foot” before you start?

Adam: Thinking that you have enough gross margin in the business. A lot of product companies think, “Ok, my costs of goods sold is $3. So I’m going to sell it for $6. Double my money.” The problem is it doesn’t leave enough room for a distributor and it really hinders your ability to grow. You’ve got to figure out from the very beginning what your margins will be.

Ty: Sometimes people focus on the now and don’t think far enough down the road to when they will need other distribution channels. That brings up the next question. If you’re not a numbers guy, is this something you should hire someone to do? Or is this something you can do yourself with the right frame of mind?

Adam: I really do believe entrepreneurs should understand their numbers. But that doesn’t mean you can’t bring in a partner or CPA to help. I don’t expect every entrepreneur to be a CPA or an expert in financial modeling. But I do think it is very helpful when an entrepreneur understands the numbers. There are Small Business Development Centers all around the United States. They provide free business advising services. So that’s a really good resource to take advantage of.

Ty: This is probably not the most exciting topic to talk with a small business owner about. But I spoke with a leder a couple of months ago and he said to me, “If I know more about their business than they do by looking at the numbers, I’m probably not going to give them a loan.” Understanding these things is critically important for a small business owner, they need to know what’s going on. ProjectionHub makes this more accessible. Who is your typical user?

Adam: About ⅔ of our users are start ups in the planning phase to see if their business makes sense. We know 65% of our users are using projections in order to raise money. The average user is looking for about $250,000 in financing. But it ranges from $500 to $5 million. ⅔ of the users are projecting a loan or investment in the first couple of months.

Ty: Anybody who starts a small business has a lot of confidence in their idea. Do you see people who are jazzed about their idea at the beginning, but then after they do the numbers, they are a little less jazzed?

Adam: Yes I do. Occasionally I do some custom work and it’s kind of sad to see. Even multi-million dollar business can look bleak when you start doing projections. Even though they’re growing like crazy, the margins just aren’t where they need to be. Their cost structure and pricing structure are scary. It’s hard to run a profitable business and a lot of people are seeing that as they go through the process.

Ty: I also imagine there are guys who say, “Wow, I have an even better idea than I thought.”

Adam: Several people have said, “If things continue as they are, I don’t want to show that to investors because they will think it’s unrealistic.” But the entrepreneur thinks that it’s really going to happen. So they temper things down a bit to make it look a little more reasonable. So yes, I hear that a lot as well.

Ty: Speaking of projections, what do you see in the future for ProjectionHub?

Adam: Bringing the power of the web to projections can really add a lot of value. There’s a lot of cool things you can do on the web that you can’t do in Excel. Going forward, we’re going to build out specific industry models, for example software service companies, mobile app companies, a gym, a salon. Long term we want to integrate ProjectionHub with QuickBooks and other bookkeeping software. So we can say, “Here are your projections for the next three years. Let’s monitor how you actually do.” Then we can say things like, “Your margins weren’t what you thought they’d be, these might be some of the reasons why.” You could also pull in industry specific numbers like for a restaurant your food service costs are way too high. So we can kind of make the system smart. And hopefully help the business owners improve incrementally.

Ty: I think this is really important. Lenders want to know what you’re going to do and how you’re going to do it and projections are a really important part of that. If anybody in our audience is interested in contacting you to access your software or consult with you, how do they get in touch with you?

Adam: ProjectionHub.com. Sign up for a free account and start going through the process there. If you have any specific questions, my direct email is [email protected]. I’d be happy to talk and figure out how we can help and see if we can put together a set of projections.

Patrick: This is why I like doing this show. I know a lot of people aren’t going to get into this podcast unless they’ve got an idea. But this is why this show works. Adam has found a hole in the market for creating projections and he has now set out to fill that hole. That’s what the Business Fuel Podcast is all about, entrepreneurs. So congratulations.

Adam: Thank you so much.

Ty: Absolutely. I think it’s awesome.

Patrick: We’ll go ahead and wrap up today’s edition of the Business Fuel Podcast. You can check out co-founder, Adam Hoeksema, at ProjectionHub.com. And you can try it out for free, is that right?

Adam: Yes. That’s right.

Patrick: You’ve also been featured in Entrepreneur magazine. I’m not familiar with launchrock.

Adam: Launchrock is a lending page system. So if you have a company and you don’t have the whole website built, it’s a quick and easy way to get a site up. It’s a place to capture an email address and say, “Here’s what’s coming soon and let us notify you when we’re ready. For a lot of people, this is version one of the website while they’re developing the whole thing.

Ty: Basically, it’s right in line with what we’re doing today. We’ve talked about the 5 C’s of business lending. But I came across an article that Kate Lister wrote for Entrepreneur, “The 3 Questions That Every Lender Wants to Know First.” It kind of coalesces the 5 C’s into 3 questions and if you can answer these questions, you chances of getting a loan are even greater. I’m not going to spoil it. I’m going to let you go to Forbes and read it.

Patrick: So Forbes.com and in the upper right corner, type in Ty Kiisel. Plus you can see everything he’s been writing for years. A couple of weeks ago you had an article on Salt Lake ComicCon. I think it was Brian Brandenberg you were talking to.

Ty: Yeah, I did an interview with Brian and some of the things he did to take what was a brand new event in Salt Lake City and turn it into the most successful first event ever for ComicCon. Whether it was New York, Los Angeles, Chicago, whatever. The Salt Lake Comic Con was the biggest first time Comic Con ever. It’s a pretty interesting read. He’s a smart guy. There’s lots of fun lessons that entrepreneurs can learn.

Patrick: Again Forbes.com. Just do a search for Ty Kiisel. You can also read everything he produces for Lendio on Lendio.com/blog. That’s where you can also pick up the podcast, Lendio.com/blog. You can also subscribe to it on iTunes. All you have to do is search for Lendio and you can find the podcast that way. So for Adam Hoeksema, Ty Kiisel, I’m Patrick Wiscombe. Thank you for listening and we will talk to you next week.

Bringing you interviews with top business professionals and business financing tips to help fuel your American dream. This has been the Business Fuel podcast, with your hosts, Ty Kiisel and Patrick Wiscombe, heard exclusively on Lendio.com

California loans made pursuant to the California Financing Law, Division 9 (commencing with Section 22000) of the Finance Code. All such loans made through Lendio Partners, LLC, a wholly-owned subsidiary of Lendio, Inc. and a licensed finance lender/broker, California Financing Law License No. 60DBO-44694.